Hedging Effectiveness in the Index Futures Market

Laurence Copeland and Yanhui Zhu

Chapter 6 in Nonlinear Financial Econometrics: Forecasting Models, Computational and Bayesian Models, 2011, pp 97-113 from Palgrave Macmillan

Abstract: Abstract In the textbook model of hedging an index, the solution to the problem is presented at its simplest. When a futures contract is available to track the index at all times, then one may use it to take a short position large enough to match the index holding one for one. More generally, if we recognize that in most cases the basis will not be continually zero, one can create a hedge in the same proportion (“the hedge ratio”) as the slope coefficient in the regression of the cash on the futures price.

Keywords: Future Price; GARCH Model; Index Future; Index Arbitrage; Hedge Ratio (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1057/9780230295223_6

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